The Hindu Business Line : Tech School

Most technical analysts would be familiar with the widely-used Japanese candlesticks charts. But the wise-men of ancient Japanese devised at least two more methods of chart construction that are just as useful in gauging the trend and in generating buy and sell signals.

The Renko chart used by the ancient Japanese is very similar to the point and figure chart that we discussed in our last column. Renko charts too do not take time and volume in to cognizance but are drawn based on the price movement alone.The ‘X’ and ‘O’ in point and figure charts are replaced with white and black bricks to denote upward and downward movement in price respectively. Whenever the price moves by a certain pre-determined measure a white or black brick is added to the next column. Buy signals are generated when the black bricks change to white and sell signals are generated when the white bricks turn to black. The chart below shows a Renko chart of Colgate. The bricks change from white to black as the trend reverses lower and vice versa.

The Kagi charts devised by the Japanese are also an ingenious way to generate buy and sell signals. These charts too are drawn based on price movement alone and include vertical lines of varying thickness interspersed with small horizontal lines. As long as the price is making higher peaks, the vertical line is thick, indicating an up trend. When the price is recording new lows, the vertical price is thin. When the movement is counter to the prevailing trend by a pre-determined reversal value (that is usually 4 per cent), a horizontal line is drawn before changing the direction of the vertical line. A Kagi chart of Colgate is plotted below.

Line charts are the simplest and the most basic charts used in technical analysis. A series of past prices is joined together with a line to form these charts. Please refer to the line chart of Colgate Palmolive given above. — Lokeshwarri S.K.

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